Third-Quarter Earnings Are Off to Rocky Start

Many investors were expecting third-quarter earnings to be bad. And so far they haven't been disappointed.

This week, several big companies have reported weaker profits or warned that results would be worse than expected. They include such household names as Alcoa, Chevron and Monsanto.

Not surprisingly, the markets slumped Wednesday in reaction, although the earnings season has only just begun.

"There's nervousness about the earnings and what could be buried inside them," said Joe Saluzzi, co-manager of trading at Themis Trading.

"We're seeing a little bit of a wait-and-see attitude in the market," said Alec Young, market strategist at S&P Equity Research. "Everyone knows third-quarter earnings are going to be lousy so it's going to be all about guidance. You want to see the guidance validate the rally that we had."

Refining Profits Hit

Oil giants Chevron and Valero were among those issuing profit warnings, blaming weakness in refining margins.

Investors had hoped earnings would start on a firm footing to ease concerns about the toll of the housing slump on the economy.

"To some extent, there's a certain amount built-in that third quarters are never good," said Marc Pado, U.S. market strategist at Cantor Fitzgerald. "But living up to expectations of having a bad quarter isn't going to help the market. Upside surprises would be better."

Other Big Names

Other names included International Paper, which on Tuesday lowered earnings estimates for the third quarter after saying land sales would bring in less than expected.

Other bad news came from retailers Petsmart, which cited weak consumer spending and sales hurt by unseasonably warm weather, and Children's Place Retail Stores, which slashed its forecasts while blaming price cuts for its troubles.

And engineering and construction company Shaw Group posted a third-quarter profit versus a year-ago loss on sharp growth in demand for power generation and petrochemicals processing.

And some market pros think the expectations may have been lowered too far because of fears that the credit crunch will extend beyond the financial sector.

"I think the estimate for this quarter...is probably too low," said David Spika, vice president and investment strategist of WHG Funds. "The fear of what was going to happen in the financial sector, I think, caused analysts to ratchet down